“The ITL will create a controlled environment for worldwide carbon trading. It is at the heart of how certified emission reductions (CERs) will be brought into the ETS system from January 2008,” said Paul Newman, managing director at London-based energy broker ICAP Energy.
The ITL will allow industrialised, or 'Annex 1', nations under the Kyoto Protocol to trade assigned amount units (AAU), which are the Kyoto equivalent to Europe’s EU emission allowances. There are expected to be around 56 billion tonnes of AAU in the ITL system over the Kyoto Protocol’s five-year period from 2008 to 2012.
“With such quantities of emission allowances in the Kyoto system, recording their whereabouts at all times is crucial to the integrity of the Protocol,” said Yvo de Boer, executive secretary for the Bonn-based UN Framework Convention on Climate Change.
The ITL will become fully functional once national registries have established operational links with the ITL. All registries must pass an official set of tests to ensure they meet the necessary standards before they can operate. So far, eight registries have been approved to operate with the ITL. They are the registry of the Clean Development Mechanism and those of Austria, the Czech Republic, Hungary, Japan, New Zealand, Switzerland and the UK. A further seven European registries have passed the technical tests and are finalising their documentation. Registries are scheduled to have all completed their ITL approval processes by mid-October 2007.
“The functioning of the ITL would give an enormous boost in confidence to the carbon market, especially with companies that take a more careful approach to entering the market, as they might not have the mandate to trade if there is no robust delivery mechanism in place,” said Sara Stahl, head of business development and marketing in London at the Amsterdam-based European Climate Exchange.
The ITL could change the way that CERs are traded because it will provide spot prices for CERs. “At the moment you can only trade CERs on a forward basis. When the ITL is operational, a spot market will develop as well,” says Stahl.
Under the 1997 Kyoto Protocol, 36 industrialised countries are required to reduce greenhouse gas emissions by at least 5% below 1990 levels between 2008 and 2012. A total of 175 countries have now ratified the treaty, which entered into force in February 2005. As for the future of the ITL and the carbon-trading market, “this may even lead to a further phase after the Kyoto Protocol treaty ends in 2012,” says Newman.
The week on Risk.net, December 2–8, 2016Receive this by email